Foreclosures hurt home values: study

Foreclosure significantly reduces the value of a home and can also lower the value of neighbouring homes, U.S. research suggests.

The sale price of a foreclosed home is lower by 27 per cent on average, finds a study conducted by economists at Harvard University and the Massachusetts Institute of Technology. Homes within 75 metres of a foreclosed home also see their prices drop by one per cent.

Around 4.3 million homeowners in the U.S., or about eight per cent of all Americans with a mortgage, were at risk of losing their homes in March, the U.S. Mortgage Bankers Association said. These individuals had either missed at least three months of payments or were in foreclosure.

The researchers studied the reports of sales of 1.83 million homes in Massachusetts between 1987 and 2009.

"The losses on foreclosed homes proved to be much larger than we had expected," said lead author John Campbell, the Morton L. and Carole S. Olshan professor of economics at Harvard, in a release.

The study's authors also discovered that if a home was sold after its owner had passed away, its value dropped an average of five to seven per cent. And if an owner went bankrupt, the home's price would drop by approximately three per cent.

The researchers believe that buyers perceive homes that have been foreclosed as more prone to damage and vandalism, while banks are keen to sell them quickly, even if that means they receive a lower price. As for homes of owners who have died, they are seen as in need of repair due to poor maintenance by prospective buyers.

The study is to be published in the American Economic Review.